Abenomics: Preliminary Analysis and Outlook

In early 2013, Japan enacted a monetary regime change. The Bank of Japan set a 2 percent inflation target and specified concrete actions to achieve this goal by 2015. In 2013, Shinzo Abe’s government supported this change with fiscal policy and planned structural reforms. Together with the Bank of Japan’s aggressive monetary easing, this policy package is known as “Abenomics.” We show that Abenomics ended deflation in 2013 and raised long-run inflation expectations. Our estimates suggest that Abenomics also raised 2013 output growth by 0.9 to 1.8 percentage points. Monetary policy alone accounted for up to a percentage point of growth, largely through positive effects on consumption. In both the medium and the long run, Abenomics will likely continue to be stimulative. However, the size of this effect, while highly uncertain, thus far appears likely to fall short of Japan’s large output gap. In part this is because the Bank of Japan’s 2 percent inflation target is not yet fully credible. We conclude by outlining a way to interpret future data releases in light of our results.